Borrowers rush to fix loans as lenders cut rates
AFTER being squeezed out to the home buying wilderness for years, the regulatory and banking measures to dissuade investors (particularly from overseas) are starting to have an impact and the door for first home buyers is opening.
Figures out last week showed the proportion of first home buyers in the property market hit a four-year high in July, while their demand for loans for new houses hit a 38-year high.
That’s great. Now the key is to make sure the home you buy is one you can afford. Here are seven steps to make sure you’re on the right track:
CHECK CREDIT SCORE AND LOOK AT YOUR CASH FLOW Knowledge is power and you want to know how good a customer you will be for the financier if you borrow from them. You can find out how you rate, free, at a number of credit score websites.
The higher your score, the better the interest rate on your mortgage you may be able to negotiate. Good credit can mean lower monthly payments, so if your score is not great, consider delaying such a big purchase until you’ve repaired your credit score.
Banks have an advertised home loan interest and then discount that rate according to how good a payer or customer you are. Having other products, like insurance and credit cards, with the bank should also qualify for a discount.
As for monthly payments, experts say a good rule of thumb is to make sure the total TIM McINTYRE
INTEREST rate uncertainty continues to spook Australian borrowers, who are rushing to lock in their home loans, encouraged by recent fixed rate cuts by major banks.
Demand for fixed home loans has hit a four-year high, Mortgage Choice data shows, accounting for 31.05 per cent of all loans written in August. This was up from 29.63 per cent in July, according to mortgage Choice CEO John Flavell.
“Demand is at its highest level since December 2013, when fixed loans accounted for 33.06 per cent of all loans written,” Mr Flavell said. monthly repayment doesn’t consume more than 30 per cent of your take-home pay. If it’s higher, then have a plan to reduce it over a short period.
Because trading houses is so expensive (stamp duty, conveyancing fees, moving costs) plan to be in this first home for at least 10 years.
HAVE CASH FOR A DEPOSIT
Technically you can negotiate any deposit with the vendor. These days it can be as low as 5 per cent and is often contingent on the length of the settlement. A rule of thumb is the shorter the settlement, the smaller the deposit can be negotiated.
But your financier may stipulate a higher deposit so that you have greater equity in the property to protect the value of the home loan from any falls in property values.
Just remember if the deposit is less than 20 per cent the financier will often require you to take out mortgage insurance which will cost 0.5-1 per cent of the value of the loan each year.
So that discount on the interest rate from being a good customer could be eaten up in insurance.
PLAN FOR SURPRISE EXPENSES
Even if you can afford the monthly payment, be aware of hidden costs. Buying a home means stamp duties, legal fees, insurance and council rates that can add up to hundreds a month. For people who have been renting, these extra costs can be a shock so make sure you have a bit of a slush fund. “Recently we have seen a number of Australia’s lenders cut the interest rates charged on some of their fixed rate products.
“Fixed rate home loans are now very competitively priced, which has made them more attractive to homeowners who are looking for repayment security.”
Queensland experienced the highest demand with 35.48 per cent of loans fixed; a giant leap from the 28.08 per cent recorded the month before. South Australia was next with 34.4 per cent, while New South Wales saw 33.66 per cent of loans fixed.
And find out whether you qualify for a first homeowners grant or stamp duty concessions in your state.
GET PRE-APPROVED FOR A MORTGAGE
Once you have the budget and have decided to take the plunge, determine how much you can afford to spend and stick to it. company Canstar has also seen a trend of customers looking for rate certainty, with the number of website users who have changed their search from variable to fixed rates increasing by 4 per cent since the previous quarter, according to Canstar finance commentator Steve Mickenbecker.
“Banks have been using fixed rate loans as their price leaders,” Mr Mickenbecker said.
“Comparing average package rates for the major banks for residential principal and interest loans, the two-year fixed rate is 0.53 per cent below the variable rate … there is an immediate saving enticing the
Talk to the bank about a preapproved loan up to a certain limit before house hunting, which demonstrates to you the real estate agent and to vendors how much you can afford.
When you’re in a bidding battle. a vendor will usually take an offer from those with a preapproval letter before those without one. borrower to switch.
“With two year fixed rates … averaging 3.92 per cent and three-year fixed rates averaging Illustration: TERRY PONTIKOS
But you don’t have to spend every cent up to the approved loan. It’s generally good practice to aim for a home that costs less than the maximum approved amount.
FIND THE RIGHT REAL ESTATE AGENT
Always remember real estate agents are working for the 3.97 per cent, fixed rates are allowing the banks to market loans that are starting with a three.”
Luring new customers with attractive fixed rate products is a way for banks to safeguard against the effects of upwards or steady variable rates on existing customer numbers.
“With the cash rate sitting at a record low for 14 months, a further downward move is looking unlikely,” Mr Mickenbecker said.
“This means the risk of a high cost early exit from the loan, if that becomes necessary, is relatively low.
“Picking the bottom is always tricky, but rates appear to be near the bottom of the cycle. It looks like the only way they’ll be going in the medium term is up.”